Silver Facts and Fiction

Bob Moriarty, president of 321gold.com, penned an interesting silver piece yesterday. I think Moriarty makes a lot of good points (especially about supply and demand, the lack of a silver shortage, Eric Sprott’s brilliant marketing, and how $SLV has been a bigger boom to silver prices than any other factor), but unfortunately he has a couple of blatant factual inaccuracies that I wanted to mention quickly, as they detract from his message.

“Most people don’t know this because they don’t read the small print but if you have a savings account, the bank has the right to withhold payment for up to 90 days. And all mortgages are essentially 90 notes at their heart. That’s right, the bank can demand full payment within 90 days if they wish and during the 1930s that’s how thousands of Americans lost their homes even when they were paying their mortgage.”

I’m not aware of the 90 day savings account rule – I know for a fact that my bank account has a 7 day rule – the bank has the ability to withold payment for up to 7 days, although they note that they have never used this “clause” and have no expectation of using it. As for the second part about mortgages being essentially 90 day notes: wtf is that all about? “The bank can demand full payment within 90 days if they wish?” Huh? I almost wonder if Moriarty is just making this up as an example of how people will believe any piece of absurdity they read on the internet – something he mentions elsewhere in his article. If I’m off base here, and it turns out that banks actually have the ability to demand payment in full of your mortgage within 90 days, by all means, readers, please point me to the facts here – but this claim seems downright wrong, and downright wrong claims detract from the validity of the rest of the piece, as they require the reader to go and verify every claim that is made.

Moriarty also gets into a discussion of Eric Sprott and Sprott’s PSLV physical silver trust.

“Eric Sprott started his own paper silver fund called the Sprott Physical Silver Trust. It’s still paper silver like SLV or the CEF fund. It has some unique features, not benefits but features. He has done a brilliant job of promoting it.

Recently he purchased $300 million dollars more physical silver to put in the closed fund. As a result of his excellent promotion, as of last Wednesday, silver was selling for $46. If you bought the CEF silver fund, you paid $47.88 for silver. If you bought SLV, you paid $46 with no premium but if you bought PSLV, the Sprott Silver Trust, you paid an incredible $57.73 an ounce for silver.

I’d say that Eric Sprott buying $300 million dollars more silver lately was incredible timing. He pocketed probably $60 million in profit. Is Eric Sprott bullish on silver? I’d say so. He has 60 million reasons to be bullish. He can buy at the exact top of silver and watch a 25% decline and still make money.”

Eric Sprott did not purchase another $ 300MM in silver for the PSLV Trust. I’m not sure what Moriarty is talking about here. Both $CEF (Central Fund of Canada) and $PHYS (Sprott’s Physical Gold Trust) recently completed secondary offerings, but PSLV did no such thing.

Even more importantly, if Sprott HAD done a secondary offering for PSLV, he wouldn’t pocket that 25% premium. I explained that in a prior post, but let me repeat the mechanics. (oh, by the way, the mainstream media finally seems to have gotten wind of of Sprott’s registration of the PSLV shares that his funds own, which I wrote about more than 6 weeks ago – probably because an updated prospectus was filed last week)

If PSLV were to sell shares to the public, the money raised by such an offering would go to the PSLV Trust – NOT to Eric Sprott. In other words, if $PSLV were to sell new shares at a 20% premium to NAV (for example, purely hypothetical), the Trust would get that “extra” 20% and use it to buy “more” silver to back the newly issued shares. Sprott doesn’t pocket it. Moriarty’s math indicates that he thinks Sprott would buy silver at NAV and sell new shares of PSLV to the public at a 20% premium to NAV, and then just put the silver in the Trust, pocketing the premium (20% of $ 300MM = $ 60MM – Moriarty’s figure). It simply does not work like that.

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